Facing the Age 73 RMD hurdle - any advice on tax strategies?

[PaulR888]

Ed Slott is not the brightest bulb on the tree when it comes to the math involved with retirement finances. (No offense, Ed.)

I don't have access to the dollar amounts he was dealing with personally in 2010, so I can't comment on how better or worse different strategies would have been.

It's important to understand that Ed has a vested interest in the whole Roth conversion "industry", for lack of a better term.
So when Ed comes on TV, it's best to listen critically for a while before searching for something better to watch...

Ed Slott, CPA, is the nationally recognized IRA and retirement planning distribution expert. Who are you?

 

[RunningBum]

Craig Wear's strategy has some merit, but I don't have the huevos to do it. When you do a mega-Roth, at the moment you hit the point of 85% tax ceiling on Social Security, your taxes come down. And the big IRMAA hit is only for one year. Ed Slott did that in around 2010 when the IRS allowed a one-time 2 step conversion with taxes paid over a two year period. Ed is all smiles now. He has no regrets.

There's no "one size fits all" formula that fits everyone. Plenty of people are beyond the SS tax hump without RMDs. But, if you happen to fall into the early part of the SS tax hump window, it very well could make sense to do a large conversion or two. 10 years ago I thought I'd be in the middle of the SS tax hump when I start taking SS, but since the SS taxation formula is not inflation adjusted, I will be beyond it.

2010 was a one time situation because you could convert that year, and defer paying taxes in 2011 and 2012. I wish I had analyzed my own situation better then, and taken advantage of it, like Ed did. But there's no lesson to be learned that you can apply to the present.

 

[PaulR888]

This is definitely not true.
Some of us have had 85% of SS included in AGI from the beginning.
I'm close to the top of the 24% Federal tax bracket with zero Roth conversions and pay around $34,000 in Federal income tax (last year).
If I did a $200,000 Roth conversion this year, I would owe around $66,000 additional Federal tax.
That strategy would NOT bring my taxes down...

At the point your income reaches the maximum taxable SS, the tax on your next dollar of income comes down because it is no longer carrying the extra tax on SS. Whatever, welcome to #3 on my ignore list. I have no time for your nonsense.

 

[rk911]

Quick question for those managing their own tax strategies in retirement...
I’m trying to plan out the next few years and keep getting stuck on the "Age 73" RMD hurdle. For those who have a solid amount sitting in traditional 401ks or IRAs, how are you handling the forced distributions without getting absolutely crushed on taxes?
Are most people here actively doing partial Roth conversions early in retirement to lower the total RMD hit, or are you just waiting it out and taking the tax bump when the time comes? Would love to hear what strategies actually worked for you.

We just donste 100% of our RMDs to charity via QCD.

 

[TheWizard]

Ed Slott, CPA, is the nationally recognized IRA and retirement planning distribution expert. Who are you?

I am someone who understands math, money, and taxes and am not trying to fool people into purchasing my services and products under false pretenses...

 

[Souschef]

I have my RMD divided 3 ways.
1. Estimated taxes
2. Large QCD's
3. Gifts to our 4 sons. (warm hand)

 

[Gumby]

At the point your income reaches the maximum taxable SS, the tax on your next dollar of income comes down because it is no longer carrying the extra tax on SS. Whatever, welcome to #3 on my ignore list. I have no time for your nonsense.

MODERATOR NOTE: We can disagree without being disagreeable.

 

[YellowSubmarine]

Quick question for those managing their own tax strategies in retirement...
I’m trying to plan out the next few years and keep getting stuck on the "Age 73" RMD hurdle. For those who have a solid amount sitting in traditional 401ks or IRAs, how are you handling the forced distributions without getting absolutely crushed on taxes?
Are most people here actively doing partial Roth conversions early in retirement to lower the total RMD hit, or are you just waiting it out and taking the tax bump when the time comes? Would love to hear what strategies actually worked for you.

The RMD tax strategy should have been in place while developing the IRAs. We must not forget that the early tax benefit for the tIRA process will be a taxable element down the road. Personally, I performed 20 years of ROTH conversions, paid the taxes and maintained my target tax bracket. Once you're 73, there's very little control over the taxable portion.

 

[ChrisC]

I have my RMD divided 3 ways.
1. Estimated taxes
2. Large QCD's
3. Gifts to our 4 sons. (warm hand)

My RMD goes exclusively to your number 3 and flies under the gift tax reporting level, for now. I started my RMD in January of this year (though I turn 73 in December), and it went to my oldest daughter and spouse; next January we will take my RMD and distribute to son and spouse the same amount we gave the prior January; we'll follow that with RMD distribution to my youngest daughter the next year in likewise amounts over two years to fly below the annual gift tax reporting levels. After this rundown, we expect to distribute my RMDs each year in equal levels to our children/spouses.

My wife has no RMDs since we converted all her tax deferred accounts to Roth a few years ago. We've been doing Roth conversions after we retired in 2013. I started Roth conversions in 2020 after we were done with her Roth conversions. The mid-year gains in my tax deferred account (now all in TSP) are three times the amount of the RMD I took in January of this year. All of our retirement accounts are destined for our heirs and we live entirely off of pensions, Social Security benefits, and taxable dividends/interests -- which place us in the lower end of the 24% tax bracket. I will do additional, modest Roth conversions after my RMDs to bring us to the top of the 24%. Managing RMDs (which we call in my family as "Reluctantly Moving Dough") is a great problem for us to have for my adult children -- I don't direct them to use the gifts and we're very happy to give them this for whatever use they have for the funds -- they are very financially responsible.

Our RMD transfers to children are one step in our legacy planning for them.

 

[target2019]

If you're going to be "absolutely crushed on taxes" that is a result of your faithful investing effort. Now follow the three options to determine the amount of crush.

My first year of RMD gives us a sweet, second pension of sorts. I never thought of it as a crushing.

 

[Surewhitey]

Our plan is to focus on the ACA for the next 10 years and then up to ~$100k annually for the 10 years to 75.

SS & a small pension will eat into the $100k limit gradually but then we only have ~1.5 to convert & a decent post tax amount to work with. Worst case, we get into the 22% bracket a little.

 

[PaulR888]

My RMD goes exclusively to your number 3 and flies under the gift tax reporting level, for now. I started my RMD in January of this year (though I turn 73 in December), and it went to my oldest daughter and spouse; next January we will take my RMD and distribute to son and spouse the same amount we gave the prior January; we'll follow that with RMD distribution to my youngest daughter the next year in likewise amounts over two years to fly below the annual gift tax reporting levels. After this rundown, we expect to distribute my RMDs each year in equal levels to our children/spouses.

My wife has no RMDs since we converted all her tax deferred accounts to Roth a few years ago. We've been doing Roth conversions after we retired in 2013. I started Roth conversions in 2020 after we were done with her Roth conversions. The mid-year gains in my tax deferred account (now all in TSP) are three times the amount of the RMD I took in January of this year. All of our retirement accounts are destined for our heirs and we live entirely off of pensions, Social Security benefits, and taxable dividends/interests -- which place us in the lower end of the 24% tax bracket. I will do additional, modest Roth conversions after my RMDs to bring us to the top of the 24%. Managing RMDs (which we call in my family as "Reluctantly Moving Dough") is a great problem for us to have for my adult children -- I don't direct them to use the gifts and we're very happy to give them this for whatever use they have for the funds -- they are very financially responsible.

Our RMD transfers to children are one step in our legacy planning for them.

Brilliant planning and congratulations. One question: who gets the second RMD you must take this year, in addition to the one you took in January for CY 2025?

 

[junkanoo]

My RMD goes exclusively to your number 3 and flies under the gift tax reporting level, for now. I started my RMD in January of this year (though I turn 73 in December), and it went to my oldest daughter and spouse; next January we will take my RMD and distribute to son and spouse the same amount we gave the prior January; we'll follow that with RMD distribution to my youngest daughter the next year in likewise amounts over two years to fly below the annual gift tax reporting levels. After this rundown, we expect to distribute my RMDs each year in equal levels to our children/spouses.

In 2026, you can gift $19K to anyone, daughter, son, town dog catcher, you name it.

So ... why not gift equally each year to all children?

 

[Jerry1]

I'm taking a hybrid approach. I'm doing some conversions, but I'm basically resigned to the fact that taxes will be paid one way or the other. I'm going to just bite the bullet with RMD's when they come due. My thought is that my tax bracket will probably not change much but the main thing that concerns me is what happens when one of us pass. If one of us passes early and the other is stuck with a large IRA, that will be pretty expensive. On the other hand, if one of us has large medical bills, a lot of that money won't be taxed. So, like most things, you never know, until you know when you pass, whether you made the right decision or not. We've also been looking into a higher level of charitable giving when we get to RMD's.

 

[Route246]

Early on, well before RMDs I either took from my 401(k)/tIRAs for living expenses and also did Roth conversions. That strategy was to protect me from huge RMDs later on. Approaching 80, I find that my 401(k) has "grown back" and is becoming a tax bomb that has only a couple of remedies. I can convert some to tIRAs and do QCDs with them or (ugh) I can pay the taxes!

Financial results have turned out much better than I expected so now, it's time to pay the piper (aka Tax Man).

By the way I DID manage to convert all my tIRAs to Roth, but that pesky 401(k) just keeps growing faster than I can deplete it. Shucky Dern!

A few things have changed my views on taxes. Because we’re at multiple times our financial independence (FI) number, the stakes feel very different. If we were only at 1× FI, I’d probably be fretting about every tax detail, but fortunately we have a meaningful financial flexibility buffer.

First, like you, the growth in my IRA has created a great problem to have: there’s more money than I ever expected, thanks to compounding and reasonably savvy investment decisions.

Second, I’ve come to realize that generational wealth is often short‑lived, so we won’t be passing down the entire pot to fund a lifestyle that could kill motivation. That may sound harsh to some, but I’ve watched too many friends and family end up with heirs who are unmotivated, or even just waiting for their parents to die. We’re shaping our charitable plans with that in mind.

Third, money doesn’t buy happiness. It really solves just one big issue: you don’t have to worry about paying the bills anymore. Beyond that, you still face health issues, family dynamics, and plain good or bad luck; money doesn’t fix those.

Lastly, my CPA—who is also a life‑long friend—sat me down and told me to stop saving. In his words, I’ve “won the game.” He’s proud of what we’ve built and thinks it’s time to enjoy the time I have left instead of trying to squeeze every last bit of tax savings out of our lives. He said I can afford to live a very nice life, leave a very nice legacy, and never worry about money again. When I brought up IRMAA, tax brackets, and RMDs, he literally laughed. His question was, “Does it really matter? You save a bit more and how does that change your life? Just to leave more money to your heirs? Does that truly matter?”

 

[ChrisC]

In 2026, you can gift $19K to anyone, daughter, son, town dog catcher, you name it.

So ... why not gift equally each year to all children?

Didn't do it for 2026 since my RMD was $75K and oldest daughter and spouse were transitioning in employment and my wife and I thought this would give them breathing room to sort out their situation (the other children didn't need or want any funds as they are in the 37% and 35% tax brackets). So, the RMD was deposited in my joint account with wife at Navy Federal Credit Union and we then turned around and transferred $37K to daughter and $37K to son-in-law. They used the funds to pay off their mortgage -- this accelerated their plans to be mortgage debt free once they retire completely from work -- they had been doubling up on mortgage payments for a number of years. Their money their choice, though I wouldn't have done that!

Next year, we'll gift the same amount to son and his spouse. . . . and then to youngest daughter the following years. We could have done equal amounts starting in 2026 to all children but felt the family would get a better bang out of this by transferring the RMD all to oldest daughter and spouse -- they are not in the 37 and 35 tax brackets like their siblings. We try to be as equitable as possible for all children, given all their circumstances.

 

[TheWizard]

If you're going to be "absolutely crushed on taxes" that is a result of your faithful investing effort. Now follow the three options to determine the amount of crush.

My first year of RMD gives us a sweet, second pension of sorts. I never thought of it as a crushing.

I tend to agree. RMDs are ruffly equivalent to the 4% rule on your tax-deferred balance and are most healthily thought of as deferred compensation which is now becoming undeferred...

 

[ChrisC]

Brilliant planning and congratulations. One question: who gets the second RMD you must take this year, in addition to the one you took in January for CY 2025?

I didn't take an RMD for 2025 as I don't turn 73 until CY 2026. I took my first RMD for 2026 in January 2026. (I could have delayed the first RMD until April 2027 and then of course would have had to also take the 2027 RMD at the end of CY 2027.)

 

[junkanoo]

I'm taking a hybrid approach. I'm doing some conversions, but I'm basically resigned to the fact that taxes will be paid one way or the other. I'm going to just bite the bullet with RMD's when they come due. My thought is that my tax bracket will probably not change much but the main thing that concerns me is what happens when one of us pass. If one of us passes early and the other is stuck with a large IRA, that will be pretty expensive. On the other hand, if one of us has large medical bills, a lot of that money won't be taxed. So, like most things, you never know, until you know when you pass, whether you made the right decision or not. We've also been looking into a higher level of charitable giving when we get to RMD's.

Completely understandable.

Obviously, you can't optimize for the unknown. However, the remaining spouse can disclaim an inherited IRA, or a portion of it, with the remainder going to heirs/charity as stipulated in the will.

Just for discussion purposes, let's say that the one that dies first had very significant medical bills ... perhaps in that case, the remaining spouse might want to keep more/all versus less. So, some decisions can be deferred to a later date, when more pertinent information becomes known.

Also, done tactically, in some cases, a relatively small amount of QCDs can get you out of the next level of IRMAA or the highest tax bracket you tripped across ... or both.

 

[PaulR888]

I didn't take an RMD for 2025 as I don't turn 73 until CY 2026. I took my first RMD for 2026 in January 2026. (I could have delayed the first RMD until April 2027 and then of course would have had to also take the 2027 RMD at the end of CY 2027.)

Got it! I mis-read your post. I thought you turned 73 last December and for tax purposes deferred the RMD to Jan of this year. I should have known you were on top of things!! lol Also, I like you taking the RMD early. Why leave it in tax-deferred and continue compounding the imbedded IOU to the IRS.

 

[gauss]

If you have a reason to buy a SPIA with your Traditional IRA, you might want to look into the Secure Act 2.0 new rules allowing the annuity payouts to be subtracted from the RMD. Basically, you add your Traditional IRA balance (after spending some from the IRA on the annuity) plus the year end FMV of the annuity. Use this total to calculate your RMD and then subtract the annual annuity payment. What's left is your new RMD for the year.

But won't you pay income tax on the full yearly annuity amount each year?

This combined with the lower RMD would create similar taxable income in both cases if I am not mistaken.

Perhaps I am missing something. I haven't thought about it too deeply.

-gauss

 

[ChrisC]

Just for discussion purposes, let's say that the one that dies first had very significant medical bills ... perhaps in that case, the remaining spouse might want to keep more/all versus less. So, some decisions can be deferred to a later date, when more pertinent information becomes known.

My children know that if I die first my wife with the inherited tax deferred account from me will not likely continue gifting RMDs at the same level that occurred when I was around, particularly if we're in a CCRC with a high monthly maintenance fee. My pension has a 55% survivor's annuity benefit to her and my modest, enhanced SS Fairness Act spousal benefit gets eliminated. So, she might need the RMDs to comfortably cover her living expenses (without invading the Roth accounts or other tax advantaged positions designed for heirs). On the other hand, if she predeceases me, my pension benefit gets increased by 10%, I get a SS survivor annuity equal to her current retirement benefit (and lose my modest SS spousal benefit but the lost isn't so great because I wouldn't be paying for IRMAA for her Medicare Part B premiums or LTCi premiums) -- in this situation, I'd likely continue gifting RMDs.

You can only plan for the potential known, unknowns.

 

[SevenUp]

However, when you are ultimately paying taxes on the RMDs, if you assign the highest tax brackets to the RMD, you might be in the 32% bracket for just a cup of coffee, while also filling up the 12-22-24% brackets. So, the distributed cost of all the applicable brackets is your real cost for the RMDs.

No. Any Roth conversions you do or don't do affect the "top" of your RMDs. See below.

I agree.
I look at all "mandatory" retirement income at being taxed at the average or effective Federal tax rate, which is around 17% in my case.
This income, for me, includes pension/annuity income, SS, RMDs, and taxable dividends. There are adjustments for SS and dividend income.

Yes, except for the RMDs. See below.

Discretionary income gets considered at the 24% or higher marginal Federal tax rate for me and includes Roth conversions and QCDs (negatively). It would also include any additional withdrawals from tax deferred for spending and any sort of employment income (heaven help me)...

Yes, and it includes your RMDs as well. For example, you could use QCDs to make the RMD marginal rate 0%. Also, the Roth conversions you did or didn't do affected the "top" of the RMDs - in other words, the marginal tax rate on the top of the RMDs.

The Traditional vs. Roth wiki article at Bogleheads discusses this under Common misconceptions.

See also Marginal Vs Effective Tax Rates And When To Use Each.

 

[athena53]

My first year of RMD gives us a sweet, second pension of sorts. I never thought of it as a crushing.

I think if it this way: I withdraw $XX,000 per year to supplement my SS and two small pensions, increasing it every year for inflation. Up to now I've taken it out of my after-tax accounts so the tax is only on the investment income, mostly long-term gains and dividends. Now some of that MUST come out of the traditional IRAs. All of it other than QCDs is taxed as ordinary income so I net less after withholdings or have to withdraw more to pay the taxes.

Not sweet at all.

 

[Dtail]

Another aspect to think about, if more on the psychological side, is if you for example have an RMD at 80 y.o. of 5% and that equals your total withdrawal on all accounts of 4%, perhaps not so bad overall (even though the mandatory withdrawal with its mandatory tax effect) could have been lower with more Roth withdrawals.